Citi has downgraded European equities to neutral for the first time in over a year, citing growing transatlantic tensions and renewed tariff uncertainty linked to President Donald Trump’s interest in Greenland. This change reflects a weaker near-term investment climate and increased downside risks to earnings as trade frictions resurface.
The downgrade follows Trump’s tariff threats connected to Greenland, which have raised concerns about political brinkmanship potentially escalating into broader trade measures. European shares, which had recently outperformed US stocks, declined after the announcement. Citi highlighted that this escalation has undermined confidence, even as European stocks had benefitted from valuation support and improving growth expectations.
In contrast, Citi has upgraded Japanese equities to overweight. The bank pointed to clearer policy signals, better corporate governance trends, and a more supportive earnings outlook in Japan, compared with Europe’s ongoing challenges from trade uncertainty, geopolitics, and policy coordination issues.
Responding quickly, the European Union is considering retaliatory tariffs on up to $108 billion of US goods, according to sources familiar with the discussions. While no decisions are final, this potential move demonstrates how swiftly the dispute could escalate into a broader trade confrontation.
Citi warns that even without immediate tariff implementation, the uncertainty alone is sufficient to weigh on corporate investment, disrupt cross-border supply chains, and pressure equity valuations. Export-heavy sectors and companies with significant US exposure are seen as the most vulnerable if tensions escalate further.
Overall, Citi views its downgrade as a shift to a more balanced risk-reward profile for European equities rather than an outright bearish stance. However, until there is greater clarity on US–EU relations and the Greenland issue, the near-term upside for Europe is likely limited in comparison with other regions.
Original Source: Eamonn Sheridan of investinglive.com
